If Bernanke focuses on the implications of the Fed’s forecast then we could see broadening of USD weakness, if on the other hand Bernanke’s testimony highlighted the fundamentals of the Fed’s Forecasts then risk trades could be curtailed to the benefit of the Japanese currency

Oil Breaks 200-day MA ($77.40) for the first time since in 3 weeks

Fed Chairman Bernanke’s testimony to Congress (18:00 GMT) will undoubtedly reiterate the Fed’s downward revisions to growth and inflation, but the immediate market impact shall depend on the emphasis of the testimony.

If Bernanke focuses on the implications of the Fed’s forecast i.e. maintaining low rates for an extended period and/or lengthening maturity of its Agency/mortgage back securities, then we could see broadening of USD weakness via lower 2 and 10 yr bond yields—especially if 10-yr yield break below 2.90%. Commodities and their currencies could be supported along with equities as long as “extended period” element of the low rates is emphasized, rather than the causes of it.
If on the other hand Bernanke’s testimony highlighted the fundamentals of the Fed’s Forecasts (lower GDP growth, inflation and higher unemployment), then risk trades could be curtailed to the benefit of the Japanese currency, which has consistently rallied on the slightest retreat in equities.

EURUSD remains largely underpinned by the mostly positive rumours of French and Spanish banks passing their stress tests and anticipation of further dovishness from Bernanke. EURUSD is likely to remain supported above $1.2745-50 — June 30 trend line—by Bernanke’s dovish testimony. While 10-yr yields will remain key in gauging USD direction, attention will also shift towards 2-year yields as they retreat back towards the record low of 0.56% in the event of Bernanke’s testimony. German-US 10-yield spread remains at -0.30 bps, above its 200-day MA. Any move back up towards -0.20 bps will further support EURUSD back near $1.2950s. Weekly stochastics continue to suggest a break of $1.30 before month end.

What’s with Loonie? CAD is the strongest currency over the last 24 hours, dragging USD from 1.0580 to 1.0350 and JPY from 82.00 to 84.20. We find it inaccurate to attribute CAD’s strengthening to yesterday’s BoC rate hike, as the decision was accompanied by a downward revision of 2010 and 2011 Canadian GDP growth, which proved CAD negative for about 2 hours. More appropriately, CAD gains had emerged on the heels of the broadening rally in risk appetite around Tuesday London close, which was accelerated by French and Spanish newspaper articles quoting Spanish economics minister and France Fin Min that all their banks will pass the tests. USDCAD eyes 1.0320 trend line support, a break of which to extend losses towards 1.0275.

USD and Discount Rate Minutes There was hardly a mention of yesterday’s USD strengthening in the aftermath of the release of minutes (18:00 GMT) regarding the discount rate. The minutes showed that the Dallas and Kansas Federal Reserve Banks were the remaining voters for a rate hike, after the St. Louis Fed dropped its hawkish vote.
Oil Breaks 200-day MA The positive impact of the stress test bank talk spilled over to crude oil, effectively leading to a close above the 200-day MA ($77.40) for the first time since in 3 weeks. The next key resistance stands at $79.00-30, which is deemed a required break of the 100-day MA and the 618% retracement of the decline from the May 3 high to the May 20 low.